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Understanding ETF / ETP Counterparty Risk

Tuesday 05th November '13

Boost is an award winning Exchange Traded Product (“ETP”) provider and is independent from any investment bank, swap provider, trustee or custodian. Boost ETPs have a robust and transparent collateral structure, which Boost believes offers ETP investors a best of breed counterparty risk model, where ETP investors’ interests are aligned with Boost. 

Ring-Fenced Special Purpose Vehicle (SPV)
Boost ETPs are issued by Boost Issuer PLC (the “Issuer”), an Irish domiciled bankruptcy remote SPV, under a programme for the issue of fully collateralised ETPs. The Issuer enters into swap transactions with one or more leading investment banks (each a “Swap Provider”) to achieve the return of each ETP. The return from the swap transactions provides the Issuer with the funds to meet its payment obligations under the ETPs. Credit exposure to the Swap Provider is minimised through posting high quality collateral by each Swap Provider to the Issuer. The Issuer has full ownership of the collateral which is secured for the benefit of ETP investors. 
Swap Provider and Swap Transactions
BNP Paribas Arbitrage (“BNPPA”) is the initial Swap Provider to the Boost Platform. BNPPA is a fully owned subsidiary of BNP Paribas, an A+ rated (Source: Standard and Poor’s, February 2013) global investment bank. BNP Paribas has guaranteed the obligations of BNPPA under its swaps. The swaps are reset daily, which minimises credit exposure to the Swap Provider. Further Swap Providers may be added to the Boost Platform in the future and will also be required to post collateral to a separate segregated account. 
Collateral and Cash Movement
Collateral requirements are calculated on a daily basis, and collateral movements occur as a result of a) net creations or redemptions of ETPs and b) the net daily change in the value of all outstanding ETPs. ETP creation proceeds due to the Swap Provider are only paid once the required collateral has first been delivered to the Issuer’s account by the Swap Provider. Similarly, where cash is due from the Swap Provider to fund ETP redemption payments, collateral will only be returned once the cash has first been received into the Issuer’s account from the Swap Provider. This ensures that the ETPs remain fully collateralised. Each day the total value of outstanding ETPs is calculated using the previous day’s closing prices and is compared to the value of the collateral (after applying relevant “haircuts”). Collateral is then transferred by or to the Swap Provider to ensure that its obligations remain fully collateralised.
Collateral Administrator and Trustee
Bank of New York Mellon (“BNYM”) has been appointed as the Collateral Administrator for the Issuer. BNYM is an AA- rated (Source: Standard and Poor’s, February 2013) global company, with over $26.7 trillion (Source: BNY Mellon, February 2013) in assets under custody and administration. All collateral is delivered to an account in the name of Boost Issuer PLC at BNYM and is independently valued and monitored by BNYM on a daily basis. To provide greater transparency the Issuer publishes the current collateral holdings on its website each day ( The Law Debenture Trust Corporation p.l.c. (the “Trustee”) has been appointed as Trustee and Security Trustee for ETP investors. The Trustee is independent of the Issuer and manages and protects the interests of ETP investors.
Swap Provider Default Event
In the event that a Swap Provider defaults on its obligations a replacement Swap Provider may be sought. If this is not possible, the Trustee will be responsible for approving any transfer or sale of the Issuer’s assets for the benefit of ETP investors, including instructing BNYM with regards to the collateral (for example, such as the appointment of a liquidation agent to realise the collateral). Although there is no guarantee that the liquidation proceeds will meet the obligations of the defaulting Swap Provider, the liquid and diversified nature of the collateral aims to mitigate such risks. Posted collateral is segregated from each Swap Provider so as to limit contamination between Swap Providers should a Swap Provider default.
Eligible Collateral
Boost’s eligible collateral consists of liquid and diversified assets. The collateral consists of a minimum 20% in sovereign bonds (minimum rating of AA) and blue chip equities. Agreed “haircuts” are applied to BNYM’s independent market value of the collateral. A unique feature of Boost’s collateral structure is that where a Swap Provider’s credit rating decreases (based on the middle rating of three independent credit agencies), then the minimum allocation to bonds will increase in increments of 20% for each rating band. The reverse is also true for a ratings increase. Where an asset fails to meet Boost’s eligibility criteria, that asset will be excluded from the collateral’s valuation. Details of Boost’s Eligible Collateral criteria are set out in the Base Prospectus with a summary on the Issuer’s website.

Source: Boost ETP 

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